Understanding Credit Rating

Understanding Credit Rating

Understanding the Credit Rating System

The credit rating system enables you to research companies that you are considering investing in. There are three main companies that offer ratings; Standard & Poor, Fitch and Moody’s.

Standard & Poor's and Fitch assign credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, or D. Moody's assigns credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, or C.

S&P, Moody and Fitch will also assign intermediate ratings at levels between AA and B (e.g., BBB+, BBB and BBB-), and can sometimes also offer guidance for the future as to whether the company is likely to be upgraded, downgraded or uncertain.

There is a strong link between the risks of “stock market investments†and the profit you can receive from them. In order to make a profit, you should take a few risks but be careful not to risk too much.

This means that AAA companies are very good and unlikely to lose value; however, it also means the profit could be limited. You could receive more or less the same interest as with saving accounts.

If you invested in BBB, you would take some calculated risks, but make some profit. The lower quality shares you buy, the more risks you would take and the more return you would have. However, in order to reduce risk, you may not want to invest in a quality under CCC. Starting from CC you will have a lot of unknown parameters you can’t control because of the poor quality of the shares. The probability of losing your money would then be sky-high.

When you invest it is important you thoroughly research the companies, or funds in which you intend to invest in. In the new age of internet, it is easy to acquire true information. The worst thing to do is listen to rumours.

About the Author

Ben Moeneclaey is currently working for Stadia Trustees Limited who specialise in SIPPs.

Will this affect My Credit Rating?

I accidentally exceeded my overdraft limit on an internet current account. Although I have not had that account for more than a year and a half, I have held another current account with a high street bank for more than 15 years. This has never happened with them.

I understand that credit companies will be advised because of this. If this has only happened on one occasion is this likely to have an adverse effect on my credit rating? I have sent the bank a cheque to more than cover the amount.

Thanks.

Each lender scores you individually based on their own assessment of what is important. Therefore, some lenders might be interested in this overdraft issue and others won’t. Lenders will make their judgement from your application form, from any previous dealings that you have had with them as a company and also From Credit ratings agencies such as Equifax and Experian.

Credit agencies will pull together information from the electoral roll, County Court Judgements (CCJs) and many sources of financial data. Credit rating agencies allow you to check your records for free.

Overall, the more stability you have to your finances, the better. Ultimately, lenders want to know that they are going to get their money back. Stability might mean a stable job, stable accommodation, a history of not missing payments on cards/mortgages and so on.

I can’t imagine that an isolated incident like this that has been quickly rectified is going to make much of a difference in the grand scheme of things.

Disclaimer:
The answers above are for guidance only and should not be acted upon without you receiving independent financial advice relevant to your circumstances. To find and IFA please call 0800 085 3250 or go to http://www.unbiased.co.uk.

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Understanding Credit Rating

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